U.S. consumer spending rose in November amid benign monthly inflation

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Consumer spending rose 0.4 percent in November, indicating strong growth and robust demand across goods and services. This resilience is attributed to wage gains and wealth effects from high stock market values.
Amid strong consumer activity, the Federal Reserve anticipates only two interest rate cuts in 2025, down from the previously projected four. This shift reflects the economy’s unexpectedly persistent, albeit moderating, inflationary pressures.
While the economy shows resilience, experts warn that benefits primarily accrue to middle- and high-income households, leaving lower-income consumers under financial strain. Additionally, concerns arise over potential inflationary risks linked to incoming policy changes.
Strong labor market indicators, including robust wage growth and low layoffs, contribute to consumer spending. However, the saving rate decline (to 4.4 percent) suggests some consumers might be relying on savings for spending.

Consumer spending in the United States reached new heights in November, marking a strong growth trajectory that has the Federal Reserve looking at fewer interest rate cuts in 2025.

According to the Department of Commerce‘s Bureau of Economic Analysis, consumer spending increased by 0.4 percent last month, fueled by robust demand across a range of goods and services.

“The economy continues to grow from strong consumer demand as income growth and the wealth effect from higher portfolio values give consumers the capacity to spend,” said Jeffrey Roach, chief economist at LPL Financial.

Strong wage gains and high stock market values are driving this spending spree, making life easier for those at the upper echelons of the workforce. However, this headline-grabbing consumer spending news comes with a pinch of salt.

“Inflation was more benign than expected but the stickiness of some categories supports the Fed’s hesitancy to materially lower rates next year,” Roach added.

The core inflation rate, after accounting for volatile food and energy components, rose by a modest 0.1 percent last month, its smallest increase in six months. Nonetheless, the annual core inflation rate remains stubbornly high at 2.8 percent, still well above the Fed’s two percent target. (Related: American consumers are spending less as worsening inflation continues to batter households.)

The Fed, under Chair Jerome Powell, had a mixed message for investors. He described the economy as “remarkable.” However, the central bank’s decision to cut interest rates by 25 basis points to the 4.25 to 4.50 percent range indicates some lingering concerns. The Fed now foresees only two rate reductions in 2025, down from the four previously anticipated. This is largely attributed to the economic resilience and persistent inflation pressures.

Economists are not convinced that this surge in consumer spending is a sustainable trend.

“It’s mostly middle- and higher-income households that are benefiting from the wage gains and wealth effects,” noted one economist. “Lower-income consumers are still struggling under financial pressure, which is a clear warning signal.”

The latest report also highlights the significant impact of Hurricanes Helene and Milton on consumer behavior.

“The increase in new motor vehicles, in particular, can be attributed to replacement purchases following the storms,” said a Commerce Department spokesperson. “This is a one-off effect, and we should be cautious about drawing long-term conclusions.”

Experts warn against policies that could ignite inflationary pressures

With the incoming administration of President-elect Donald Trump promising to cut taxes, impose or raise tariffs on imports and deport millions of undocumented immigrants, the economy is set to navigate uncharted waters. Some experts are voicing concerns about these policies potentially igniting inflationary pressures.

“If the incoming administration raises tariffs significantly, that will provoke retaliation and usher in a period of stagflation that will rival the stagflation of the 1970s,” said Brian Bethune, an economics professor.

The silver lining for consumers is the strong labor market, with low layoffs and robust wage growth. Personal income rose 0.3 percent, with wages jumping by an impressive 0.6 percent.

“Labor market stamina is underpinning consumer spending,” noted Lou Crandall, chief economist at Wrightson ICAP. “Strong household balance sheets, reflecting high stock market and home prices, are also driving the current spending boom.”

Yet, the saving rate dipped to 4.4 percent from 4.5 percent in October, suggesting that some consumers might be tapping into their savings to fund their spending habits.

“While the economy is showing remarkable resilience, it’s not without its challenges,” said Crandall. “We need to keep a close eye on these trends to ensure they don’t lead to a more serious economic downturn.”

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